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Public Provident Fund

March 26, 2018
Public Provident Fund

Public Provident Fund (PPF) scheme is a popular long-term investment option which offers safety with attractive Interest Rate and returns that are fully exempt from Tax.

The investor can start with a minimum investment of 5000 to a maximum of 150000 in a financial year and can avail other facilities like withdrawal, loan, an extension of account.

Benefits of having the Public Provident Fund

Bank point of view
  • Transfer funds online option from linked Savings Bank Account
  • Standing  Instruction facility to ensure regular investment
  • Viewing your PPF Account statement online.
Other Benefits
  • Deposits can make in lump-sum or in 12 installments.
  • The joint account cannot be open.
  • The account can open by cash/ Cheque and In case of Cheque, the date of realization of Cheque in Govt. account shall be the date of opening of the account.
  • Nomination facility is available at the time of opening and also after the opening of an account. An account can transfer from one post office to another.
  • The subscriber can open another account in the name of minors but subject to maximum investment limit by adding balance in all accounts.
  • Maturity period is 15 years but the same can extend within one year of maturity for a further 5 years and so on.
  • Maturity value can retain without extension and without further deposits also.
  • Premature closure not allowed for 15 years.
  • Deposits qualify for deduction from income under Sec. 80C of IT Act.
  • Interest is completely tax-free.
  • Withdrawal is permissible every year from the 7th financial year from the year of opening account.
  • Loan facility available from the 3rd financial year.
Additional Benefits
  • There is a very low risk of default since it is Government back.
  • The account can open at post offices, public banks or selected private banks. Moreover, you can open the account online as well.
  • It is suitable for building a retirement corpus due to features like long-term tenure, tax-free return, compounding benefit and a better interest rate vis-a-vis bank FD.
  • PPF funds can’t attach to the court order or laid claim to by creditors.

Key Features

  • Interest rates 7.8%
  • Tenure 15 years; account continuance allows beyond maturity for 5 years at every renewal, with or without making additional deposits.
  • Initial investment/deposit: Rs.100 to open the account
  • Nomination: Allowed; on opening the account or after.
  • Fund transfer: Funds/accounts cannot be transferred between people but can be easily transferred between bank branches or post offices for free.
  • Loan facility: Loans can be availed against funds held in the PPF account from year 3 to year 6.
  • Renewal: Renewal or extension of the scheme is allowed, for an extra 5 years at a time.
  • Joint accounts: Not allowed.

Eligible for opening Public Provident Fund Account

  • According to PPF account rules, PPF account can open by any resident Indian Individuals for self and in the name of a minor child.
  • Non-resident Indians (NRIs), cannot open this account.
  • But, account holders, who leave the country and acquire non-resident status after having opened a PPF account can continue to keep their accounts until the maturity of the account.
  • NRIs are not allowed to extend account tenures at maturity.
  • Account opens by HUFs before 13th May 2005 can continue until maturity without any further extensions.
  • You cannot open a new PPF account in the name of Hindu Undivided Family.

PPF in the name of the Minor 

  • A PPF account on behalf of a minor can open by either father or mother.
  • Both the parents cannot open a separate account for the same minor.
  • An individual may, therefore, open one PPF account on behalf of each minor of whom he is the guardian. 
  • At times, grandparents are interested in opening PPF for their grandchildren.
  • PPF rules, however, do not allow them to do so when the parents of the minor are alive.
  • They can open the account only if they appointed as legal guardian after the death of the parents.

Premature closure of Public Provident Fund Account

In the past, when only loans and partial withdrawals were allowed, now even premature closure of the PPF account is possible.

It will, however, be allowed only after the account has completed five financial years and on specific grounds such as treatment of serious ailment or life-threatening disease of the account holder, spouse or dependent children or parents, on the production of supporting documents from the competent medical authority.

If the amount requires for the higher education of the account holder or the minor account holder then, on a production of documents and fee bills in confirmation of admission in a recognized institute of higher education in India or abroad, premature closure of the PPF account allows. 

Nomination 

The application form of PPF (Form-A) does not carry the provisions for nominations as it is to fill in a separate form. Make sure to fill the nomination form (Form-E) at the time of opening a PPF account to avoid any legal hassles for the nominee later on. 

Defaults, inactivation, and re-activation of Public Provident Fund Accounts

  • Minimum deposit of Rs 500 must be made in every financial year to keep the account active.
  • The bank will discontinue your account if you fail to deposit the minimum contribution.
  • Interest will, however, continue to accrue. You can regularise the account again on paying the prescribed penalty along with minimum subscription arrears. Also, facilities such as loan and withdrawal will not be available while the account is inactive.
  • To reactivate the account, the account holder will have to pay a penalty of Rs 50. This penalty is applicable for each year the account has been inactive. In addition to it, he/she will have to deposit an amount equal, at least, to the minimum investment each year plus Rs 500 for the year of activating the account.

Document required for opening PPF

One has to show KYC documents like address proof, identity proof, and signature proof. You will need the following things to open the account-

  • PAN Card, Passport, Aadhar Card, Voter’s ID, Driving License, Employer’s letter, Utility Bill, Rental/Lease Agreement, Ration Cards.
  • Signed Cheque
  • Bank Account Statements
  • Photographs
  • Account opening form along with the nomination form
  • Other necessary documents like minors birth certificate in case of minors

Conclusion 


PPF suits those investors who do not want volatility in returns akin to the equity asset class. However, for long-term goals and especially when the inflation-adjusted target amount is high, it is better to take equity exposure, preferably through equity mutual funds, including ELSS tax saving funds. 

Comparing them, however, is not warranted as both are different asset classes, with one currently generating around 7.8 percent returns as compared to the other generating (historical returns) around 12 percent return. The latter will anyhow have a higher maturity corpus (with relatively more volatility) than the former (with relatively less volatility.) Diversifying one's savings in PPF and equities would serve the purpose rather than relying entirely on any one of them. 

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